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Exam 14: Tax Consequences of Home Ownership

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Question 61

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Ilene rents a property for the entire year. During the year, Ilene reported a net loss of $15,000 from the rental. If Ilene is an active participant in the rental and her AGI is $140,000, how much of the loss can she deduct against ordinary income in the year?

A) $15,000.
B) $10,000.
C) $5,000.
D) $0.

E) B) and D)
F) B) and C)

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Question 62

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When a taxpayer experiences a net loss from a nonresidence (rental property) :

A) the taxpayer will not be allowed to deduct the loss under any circumstance if the taxpayer does not have passive income from other sources.
B) the loss is fully deductible against the taxpayer's ordinary income no matter the circumstances.
C) if the taxpayer is not an active participant in the rental, the taxpayer may be allowed to deduct the loss even if the taxpayer does not have any sources of passive income.
D) if the taxpayer is not allowed to deduct the loss due to the passive activity loss limitations, the loss is suspended and carried forward until the taxpayer generates passive income or until the taxpayer sells the property.

E) None of the above
F) All of the above

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Question 63

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A taxpayer is not allowed to deduct home mortgage interest on debt unless the debt was incurred to acquire or construct the home.

Which of the following statements regarding the home mortgage interest expense deduction is correct?

Leticia purchased a home on July 1, 2018, for $290,000. She paid $261,000 down and financed the remaining $29,000. On January 1, 2020, when the outstanding balance of her mortgage was $21,750 and her home was valued at $435,000, Leticia refinanced her home for $290,000. With the $290,000 loan, she paid off the remaining $21,750 balance of her original mortgage, she used $44,000 to substantially improve her home, and she used the remaining $224,250 for purposes unrelated to her home. During 2022, Leticia made interest-only payments of $21,750 on the loan. What amount of the $21,750 interest expense is Leticia allowed to deduct in year 2022?

Jason and Alicia Johnston purchased a home in Austin, Texas, for $500,000. They moved into the home on September 1, year 0. They lived in the home as their primary residence until July 1 of year 5, when they sold the home for $800,000. What amount of the $300,000 gain are they allowed to exclude? (Assume married filing jointly.)

When a taxpayer finances the initial acquisition of her personal residence, in general, she may not deduct points paid for loan origination fees, but she may deduct points paid as prepaid interest.

Taxpayers are allowed to deduct real property taxes at the time they pay estimated real property taxes to an escrow account established by the lender for the taxpayer's property taxes.

A taxpayer who sells a principal residence that has been used as a rental propertyafter 2005 will not be allowed to exclude the portion of the gain attributable to depreciation even if the taxpayer meets the ownership and use tests and the gain realized on the sale is lower than the maximum exclusion amount.

A taxpayer who rents out a home for at least one day and does not use a home for personal purposes for more than 14 days during the year is ineligible to deduct any home mortgage interest expense on a loan secured by the home.

Lebron Taylor purchased a home on July 1, 2019, for $500,000. Lebron paid for the entire purchase price with cash. On January 1, 2020, Lebron needed additional cash for purposes unrelated to his home, so he took out a loan secured by the residence for $150,000. During 2020, he made interest-only payments of $4,500 on the loan. What amount of the $4,500 interest expense can Lebron deduct in 2020?

Which of the following statements regarding limitations on the deductibility of home office expenses of self-employed taxpayers is correct?

Which of the following statements regarding the break-even point for paying discount points in order to get a lower interest rate on the loan is correct?

Harriet owns a second home that she rents to others. During the year, she used the second home for 10 personal days and for 200 rental days. Which of the following statements regarding the manner in which she should account for her income and/or expenses associated with the home is false?

Mercury is self-employed and she uses a room in her home as her principal place of business. She meets clients there and doesn't use the room for any other purpose. The size of her home office is 400 square feet. The size of her entire home is 2,400 square feet. During the year, Mercury received $6,300 of gross income from her business activities and she reported $2,500 of business expenses unrelated to her home office. For her entire home in the current year, she reported $3,500 of mortgage interest, $1,000 of property taxes, $600 of insurance, $500 of utilities and other operating expenses, and $3,200 of depreciation expense. What amount of home office expenses is Mercury allowed to deduct in the current year using the actual expense method? Indicate the amount and type of expenses she must carry over to the next year, if any. What amount of home office expenses is Mercury allowed to deduct in the current year using the simplified method?

On July 1 of year 1, Elaine purchased a new home for $400,000. At the time of the purchase, it was estimated that the property tax bill on the home for the year would be $8,000 ($400,000 × 2%) . On the settlement statement, Elaine was charged $4,000 for the year in property taxes and the seller was charged $4,000. On December 31, year 1, Elaine discovered that the real property taxes on the home for the year were actually $9,000. Elaine wrote a $9,000 check to the local government to pay the taxes for that calendar year. (Elaine was liable for the taxes because she owned the property when they became due.) What amount of real property taxes is Elaine allowed to deduct for year 1? (Assume not married filing separately.)

Andrew Whiting (single)purchased a home in Boise, Idaho, for $300,000. He moved into the home on July 1 of year 1. He lived in the home as his primary residence until November 1, year 2, when he sold the home for $470,000. Andrew sold the home because he was changing jobs and his new job was in a different state. What amount of gain must Andrew recognize on the home sale in year 2?

In general, total deductible home office expenses are limited to the gross income derived from the business minus business expenses unrelated to the home (that is, they are limited to net Schedule C income before home office expenses).

The ownership test for excluding gain on the sale of a principal residence requires the taxpayer to have owned the property for three or more years during the five-year period ending on the date of sale.

Mercury is self-employed and she uses a room in her home as her principal place of business. She meets clients there and doesn't use the room for any other purpose. The size of her home office is 460 square feet. The size of her entire home is 3,500 square feet. During the year, Mercury received $8,700 of gross income from her business activities and she reported $3,300 of business expenses unrelated to her home office. For her entire home in the current year, she reported $4,050 of mortgage interest, $1,490 of property taxes, $1,420 of insurance, $1,370 of utilities and other operating expenses, and $2,300 of depreciation expense. What amount of home office expenses is Mercury allowed to deduct in the current year using the actual expense method? Indicate the amount and type of expenses she must carry over to the next year, if any. What amount of home office expenses is Mercury allowed to deduct in the current year using the simplified method?